Tony Crescenzi
Chief Bond Market Strategist
Miller Tabak + Co

For a third week, the total amount of commercial paper outstanding plunged, falling a record $94.9 billion in the week ended October 1st to $1.607 trillion, bringing the cumulative drop for the three weeks to $208 billion.

The declines reflect the seizing up of the credit market and withdrawals of monies from money market funds, which held $700 billion of commercial paper at the end of the second quarter. These declines in some ways carry more weight than those of a year ago, when the market was purging issuers with mortgage-related exposures.

This time the purge is broad and is impacting issuers with far more predictable cash flows--regular run-of-the-mill companies in need of working capital. For example, the asset-backed sector saw a $29.1 billion decline in the latest week, news that fits with the poor level of car sales, which are falling under the weight of the lack of availability of credit. The declines add to the urgency for fixes to the credit crisis and bolster the case for a Fed rate cut, which is sorely on many fronts. (Crescenzi discusses bond activity with James Bianco in the video).

The commercial paper market had been relatively stable since contracting sharply a year ago and in recent weeks had seen strong increases in the total amounts outstanding, so this latest decline marks an abrupt shift. Reflecting the drying up of credit availability in the commercial paper market, commercial paper rates have surged.

For example, the 7-day rate for asset-backed commercial paper has jumped to 4.50% from the roughly 2.5% rate that prevailed over the past few months. A continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.

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The total amount of commercial paper outstanding peaked in July 2007 at $2.22 trillion before contracting abruptly to about $1.9 trillion a month later and $1.8 trillion two months later. Conditions had been relatively tranquil since then, which is not surprising for the commercial paper market, a Darwinian market that purges weak issuers is rapid fashion, as evidenced by the fact that there have been only 7 defaults in the commercial paper market since Penn Central defaulted on its paper in 1970.

As I said, issuers with mortgage-related exposures have been pushed out of the market, which is what makes this latest round of seizing up worrying, because the issuers that remain are considered far more stable entities with more predictable cash flows.

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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market." Crescenzi is a contributor to RealMoney.com."

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